Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets

45 Pages Posted: 12 Feb 2016 Last revised: 28 Nov 2017

See all articles by Paolo Falbo

Paolo Falbo

University of Brescia - Department of Economics and Management

Cristian Pelizzari

University of Brescia - Department of Economics and Management

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Date Written: June 30, 2016

Abstract

We investigate the combined effect of an Emission Trading System (ETS) and renewable energy sources on electricity generation investment in energy-only markets. We propose a simple representation of the capacity expansion decision between fossil fuel and renewable production, where electricity demand is uncertain. Increasing renewable capacity creates a tradeoff for large electricity producers: a higher share of renewable production can be priced at the higher marginal cost of fossil fuel production, yet the likelihood of achieving higher profits is reduced because more demand is met by cheaper renewable production. A numerical application of the model shows that producers prefer withholding investments in renewable energy sources, calling into question the long-term efficacy of an ETS in achieving decarbonisation goals.

Keywords: Emission Trading Systems, Emission Allowances, Renewable Energy Sources, Pass-Through

JEL Classification: L51, L94

Suggested Citation

Falbo, Paolo and Pelizzari, Cristian and Taschini, Luca, Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets (June 30, 2016). Available at SSRN: https://ssrn.com/abstract=2731288 or http://dx.doi.org/10.2139/ssrn.2731288

Paolo Falbo

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Cristian Pelizzari

University of Brescia - Department of Economics and Management

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Luca Taschini (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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